Chapter 5: Cost-Volume- Profit Relationships

To simplify CVP calculations, it is assumed that Blank______ will remain constant. Multiple choice question. total contribution margin selling price total variable cost unit fixed cost

selling price

To simplify CVP calculations, it is assumed that Blank______ will remain constant. Multiple choice question. total contribution margin total variable cost selling price unit fixed cost

selling price a) total contribution margin Reason: The per unit contribution margin will not change, but total contribution margin will change. total variable cost Reason: The per unit variable cost will not change, but total variable cost will change. selling price unit fixed cost Reason: Total fixed cost will not change, but per unit fixed cost will change.

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach. Multiple choice question. balance sheet contribution margin gross margin traditional

contribution margin

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be Blank______. Multiple choice question. $200 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100. $500 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100. $100 $400 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

$100

Contribution Margin

-the amount remaining from sales revenue after variable expenses have been deducted. -the amount available to cover fixed expenses and then to provide profit for the period -is used first to cover the fixed expense the fixed expenses, and then leftover remain goes toward profits -If CM is not sufficent to cover the fixed expenses, then a loss occurs for the period.

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the ______. Multiple choice question. contribution margin ratio Reason: You would also need the selling price. contribution margin per unit selling price Reason: You would also need information on variable costs. total contribution margin Reason: You would also need the total number of units sold.

contribution margin per unit

Profit=( P X Q - V XQ) - Fixed expenses Profit=( $250 X$351 - $150 X351) - 35,000 Profit= (250-150)X351-35,000 Profit= (100)X351-35,000 Profit=35,100-35,000 Profit=100

example of CVP the net operating income (profit) at sales of 351 speakers would be$100 fixed expense= 35,000

Cost-volume-profit (CVP) analysis

helps managers make many important decisions such as : -what products and services to offer -what prices to charge -what marketing strategy to use - what cost structure to maintain

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______. Multiple choice question. $2,200 $6,000 $3,800 $2,100

$2200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

To simplify CVP calculations,managers typically adopt the following assumptions with respect to these factors:

1. Selling price is constant. The price of a product/service will not change as volume change . 2. Costs are linear and can be accurately divided into variable and fixed components the entire relevant range. 3. In multi product companies, the mix of products sold remain constant

CVP's primary purpose is to estimate how profits are affected by the following five factors:

1. Selling prices 2. Sales volume 3. Unit variable 4. Total fixed costs 5. Mix of product sold

CVP model can be adjusted to take into account anticipated changes in______ that arise when the estimated sales volume falls outside the relevant range

1. selling prices 2. Variable falls unit 3. the sale mix 4. total fixed cost

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is $__________.

168,000 (9000 x 32) -120000=168000

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______. Multiple choice question. $40 $3,085 $6,885 $3,800

3800

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $___

5000

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit_____. ___

Contribution , margin

CVP is the acronym for - - -. (Enter only one word per blank.)

Cost Volume Profit

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

Cost-volume profit analysis

Example of Loss profit on Contribution Income statement

Name: Acoustic Concepts, Inc. statement: contribution Income Sales of 1 Speaker Sales (1 speaker) $250 $250 price per unit Variable expenses: ($150) ($150 price per unit) Contribution margin $100 $100 price per unit Fixed expense: (35,000) Net operating income: $(34,900)

Multiple Select Question Select all that apply The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit. Multiple select question. cost organizational structure volume selling price

cost volume selling price

The contribution income statement

emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profit of changes in selling price, cost or volume -Sales, variable expenses, and contribution margin are expressed on a per unit basis and in total -The manager use the per unit figures in the calculations -use inside the company and would not ordinarily be made available to those outside the company

If sales are zero the company's loss would equal

its fixed expenses. -each unit, that is sold, the reduces the loss by the amount of of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.

Estimate profit at any sales volume above break even point

multiple the number of units sold in excess of the break-even point by the unit contribution margin. The result=the anticipated profits for the period or estimate the effect of a planned increase in sales volume on profit, simply multiple the increase in units sold by the unit contribution margin, the result will be expected increase in profits

CVP analysis allows companies to easily identify the change in profit due to changes in Blank______.

product mix selling price volume

break-even point

the level of sales at which profit is zero

Example of Unit CM

the profit at sales of 351 speakers cost $100 fixed expense Profit= Unit CM X Q - Fixed expense = $100 X351- 35,000 =35,100 - 35,000 = 100

CVP graph

the relationships among revenue , cost, profit, and volume highlights CVP relationships over wide ranges of activity

Contribution margins

to reach the break-even point, the company will have to sell enough to cover fixed expenses. if enough items can be sold to generate the number in contribution margin, the all the fixed expenses will be covered and the business will break even for the month, it will neither profit nor loss , but just over all its costs

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals Blank______. Multiple choice question. $1,484,211 Reason: $564,000 ÷ 0.62 = $909,677 $920,211 Reason: $564,000 ÷ 0.62 = $909,677 $909,677 $564,000 Reason: $564,000 ÷ 0.62 = $909,677

$909,677

When a company sells one unit above the number required to break-even, the company's net operating income will ______. Multiple choice question. change from zero to a net operating profit decrease by the contribution margin per unit increase or decrease depending on total fixed costs increase by the sales price of the extra until sold

Correct answer:change from zero to a net operating profit Reason: Once the break-even point is reached, all fixed costs are covered. Reason: Variable expenses will still be incurred for each unit above the break-even point. After break-even the contribution margin becomes profit.

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is Blank______. Multiple choice question. ($64,000) ($10,000) $36,000 $54,000

Correct= 36,000 ($64,000) Reason: Net operating income = (750 - 450) × $120 = $36,000. ($10,000) Reason: Net operating income = (750 - 450) × $120 = $36,000. $54,000 Reason: Net operating income = (750 - 450) × $120 = $36,000

Multiple Select Question Select all that apply Which of the following are assumptions of cost-volume-profit analysis? Multiple select question. Costs are linear and can be accurately divided into variable and fixed elements. Fixed costs per unit stay the same within the relevant range. Variable costs per unit increase over the relevant range of activity. In multi product companies, the sales mix is constant.

Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant. Reason: Fixed costs in total stay the same within the relevant range. Reason: Variable costs per unit remain constant over the relevant range of activity.

example of Contribution income statement

Name: Acoustic Concepts, Inc. statement: contribution Income Time: For the month of June Sales (400 speakers) $100,000 $250 price per unit Variable expenses: ($60,000) ($150 price per unit) Contribution margin $40,000 $100 price per unit Fixed expense: (35,000) Net operating income: $5000

The contribution format IS can be expressed in equation form:

Profit= (Sales - Variable expenses) - Fixed expense

Unit CM= Selling price per unit - Variable expenses per unit = P-V Profit = (P X Q - V X Q) - Fixed expenses Profit= (P-V) Q - Fixed expenses Profit= Unit CM X Q - Fixed expenses

Profit= Unit CM X Q - Fixed expenses Simple profit equation in terms of the unti contribution margin ( Unit CM)

Net operating income equals: Multiple choice question. dollar sales - dollar sales to break even. (dollar sales - dollar sales to break even) × unit contribution margin. unit sales × unit contribution margin. (unit sales - unit sales to break even) × unit contribution margin.

Right answer :(unit sales - unit sales to break even) × unit contribution margin. dollar sales - dollar sales to break even. Reason: To calculate net operating income this would have to be multiplied by the contribution margin ratio (%). unit sales × unit contribution margin. (dollar sales - dollar sales to break even) × unit contribution margin. Reason: If using dollar sales instead of unit sales, you would multiply by the contribution margin ratio (%), not the unit contribution margin.

Contribution margin: Multiple choice question. is first used to cover variable expenses. is not affected by changes in activity. equals sales minus fixed expenses. becomes profit after fixed expenses are covered

Right answer: becomes profit after fixed expenses are covered -is first used to cover variable expenses. Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses. -is not affected by changes in activity. Reason: Because contribution margin is a variable amount, it is affected by changes in activity. -equals sales minus fixed expenses. Reason: Contribution margin equals sales minus variable expenses.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n): Multiple choice question. decrease in unit selling price. change in sales mix. increase in total fixed cost. decrease in the unit variable cost

Right answer:decrease in the unit variable cost Reason: A decrease in unit selling price would decrease profits. change in sales mix. Reason: A change in sales mix would only be correct if the change was a shift toward the more profitable product(s). increase in total fixed cost. Reason: An increase in total fixed costs would decrease profits. .

The break-even point is reached when the contribution margin is equal to: Multiple choice question. total sales. total fixed expenses. profit. total variable expenses

Total fixed volume

Cost-Volume-Profit (CVP) graph

a graphical representation of the relationships between an organization's revenue, costs, and profit on the one hand and its sales volume on the other hand.

The greatest dangerous lies in replying on simple CVP analysis when ______

a manager is contemplating a large change in sales volumes likes outside the relevant range

Profit= (P X Q-V X Q ) - Fixed expenses

term profit stand for net operating income only single product when a business has only a single product, the refine the equation. Sales= Selling price per unit quantity sold = P X Q Variable expenses= Variable expenses per unit X quantity sold= V X Q

Multiple Select Question Select all that apply Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______. Multiple select question. Pete's Putters is unable to make a profit lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit the contribution margin per putter is $65. the sale of 12,000 putters results in net operating income of $380,000

the contribution margin per putter is $65. Reason : Pete's Putters is unable to make a profit Reason: Pete's breakeven point is $400,000 ÷ $65 or 6,154 putters. If total sales are in excess of 6,154 putters, Pete's will make a profit. lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit Reason: If variable costs decreased by $15, contribution margin would increase by $15 to $80 per unit. the sale of 12,000 putters results in net operating income of $380,000 Reason: 12,000 units × $65 contribution margin = $780,000 - $400,000 = $380,000.

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

The contribution margin equals sales minus all Blank______ expenses. Multiple choice question. product period fixed variable

variable

The break-even point is the level of sales at which the profit equals ______. (Enter only one word per blank.)

zero